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What are some of the strategies offered by Indian debt alternates?
Here are some broad debt AIF strategies offered by AIF managers in India:
- Performing Credit: Performing credit strategies seek to make debt investments in mid-market operating companies for growth purposes.
- Venture Debt: It is a type of facility offered to early-stage, high-growth companies, which are already backed by venture capital firms. The venture debt deals are structured to include an equity component, aka “equity kicker”, which is there in the form of warrants, preference shares, rights or options. Hence, a venture debt instrument has similarities to both traditional debts with interest pay-outs and venture capital.
- Real Estate: Real estate funds in India can have a diverse focus including commercial office, residential, retail, industrial and hospitality sectors. Funds have increasingly stepped in to complement the traditional sources of capital for developers.
- Distressed/Special situations Debt: Distressed or specialized private credit funds are for more esoteric deals and sophisticated needs. The investment is done with the intention to turn around the company.
Vivriti AMC is the leader the in the Performing Credit space. Can you take us through the opportunities and risks in the Performing Credit space? Why should MFDs/RIAs look at Performing Credit market?
The opportunity where Vivriti AMC feels the risk-reward is the most lucrative is the performing credit space. These entities are typically repaying debt through operational cashflows. While banks meet their standard funding needs, private credit AIFs who understand this space and can take a ground-up approach and stand to benefit by offering structured solutions for specific requirements such as working capital correction, last mile capex and product development financing, among others.
In terms of demand for private credit, over the next decade, investment in just infrastructure, climate and green transition and agriculture, will require an estimated debt investment of Rs.250 lakh crore. Banks and NBFCs have pivoted to retail in the past few years. Private credit funds can plug this gap by offering bespoke solutions to mid-market entities.
The following are the benefits of investing in performing credit funds:
- Higher perceived risk in the space enables an experienced fund manager to lock in higher spreads over actual risk. For example: While the cumulative default rate in the ‘BBB’ rated space is 2.5%, the expected yield is 15.5%. This still allows for a risk-adjusted spread of 550+ bps over government security
- Investors potentially stand to make post-expenses, pre-tax returns of 12-13% in the debt AIF space
- AIFs can provide flexible deal structuring with the right covenants and regular monitoring
- Granular exposure with average single entity limited to 3-4% of fund size
Our analysis shows that AIFs have grown faster than mutual funds and PMS in the last five years. The commitment raised in AIFs, which denotes amount clients are willing to invest in AIFs, have increased by a CAGR of 31% compared to 25% in mutual funds and 11% in PMS in the last five years. What are the factors that have contributed to this massive growth?
The major factors that are driving the growth in AIFs are superior risk-adjusted returns, low correlation to public markets, a progressive regulatory environment and asset diversification. Additionally, economic uncertainties during Covid times and continuing geo-political tensions have resulted in volatility of public market from time to time.
For debt AIFs, specifically with recent budgetary changes bringing in tax parity, investors can make allocation decisions basis real returns without distortion due to taxation.
What’s the rationale for launching ‘Vivitri Debt++’ with Cafemutual? What kind of knowledge initiative can we expect from this?
The Vivriti Debt++ tab is launched to serve the distribution community with a go-to source for all the latest news and developments on debt AIF, which have seen increased acceptance from domestic investors driven by tax parity with debt mutual funds and the ability to deliver real returns. The tab will include knowledge-building articles about the debt AIF space and SEBI’s Accredited Investors (AI) Framework, which will enable investors to infuse an amount in AIFs that could be as low as Rs.10 lakh, significantly lower than the stipulated minimum amount of Rs.1 crore, subject to the investor obtaining an AI certificate.
What are the opportunities for wealth managers in the space of Alternative Investment Funds (AIFs)?
Data aggregated by a major industry participant has suggested that over 20% of the commitments raised by AIFs have been from individuals with a ticket size of less than Rs. 2 crore. Given the ticket size and nature of investors, it can be assumed that this is largely a distributed channel. Moreover, there are 50+ wealth partners/distributors, each having aggregate commitments of Rs. 25 crore or higher in the debt AIF space.
For the distributor, the benefits of recommending alternative funds are as follows:
- Offering a bouquet of products to increasingly aware clients instead of the traditional offerings
- Ability to grow with the client using the AI framework
- Alternative funds are one of the only products allowed to offer up to one-third of the total distribution fee upfront, thereby ensuring the distributor is compensated fairly for the higher client onboarding efforts
SEBI has introduced the concept to accredited investors in India. Can you take us through concept and benefits of accredited investors?
Accredited investors are individuals or entities recognised by financial authorities as having the financial knowledge and capacity to invest in more sophisticated and potentially riskier investment products. In India, SEBI defines and regulates the criteria for an individual or entity to qualify as an Accredited Investor.
In the AI framework, you can invest with ticket sizes that are lower than the stipulated minimum amount in AIFs. If you meet the Eligibility Criteria mentioned below, you can secure your AI certificate from a SEBI-recognized agency and invest with ticket sizes starting as low as Rs. 10 lakh in Vivriti AIFs.
* Value of the primary residence of the individual, Karta of HUF and the Sole Proprietor, respectively, shall not be considered for NW calculation
Note: If investments are jointly held and the holders are parent and children at least one member must fulfil the eligibility criteria to qualify as Accredited Investors. If the joint holders are spouses their combined income/net worth will be considered.
- Access to Private Market Investment Opportunities
- Lower Investment Ticket Sizes than regulatory mandate of INR 1 crore for AIFs
- Higher Potential Returns
- Portfolio Diversification
For more details kindly get in touch with vam.sales@vivritiamc.com